Arbitration clauses in hotel contracts.

Pros, cons, and advice for when you choose the arbitration alternative.

Before signing a hotel contract, consider whether you would like an arbitration clause. Arbitration can be a wise alternative to litigation, depending on the situation and the terms of the clause.

To arbitrate or not. Believe it or not, litigation does have some advantages, which is why some associations will not want to waive their right to litigate in favor of arbitration. In litigation, the party that files the suit gets to choose the forum, which means it can file locally for convenience and "home court advantage." The rules of discovery (pretrial disclosure of pertinent facts or documents) are mandatory and quite broad, so each party may obtain a great deal of information from the other.

Perhaps one of the biggest advantages to litigation is the right to jury trial. Another big advantage that is not available in arbitration is this: You can appeal a judge or jury verdict and perhaps get it reversed on appeal. You have at least two, maybe three or four, "bites at the apple." But arbitration is virtually unappealable. An arbitrator's award can be submitted for a court to review, but it is difficult to get an arbitration award overturned. Thus, you essentially have only one chance to win.

Nonetheless, because more and more courts require the parties to attempt mediation as a condition to going forward in court, an association could assume that it isn't really giving up much by foregoing arbitration in favor of litigation.

The main advantage to arbitration is that it is usually quicker than litigation. (A case can take years to get to trial.) Another prime advantage is that it is usually fairer, especially in the context of what are likely to be disputes over money. Arbitrators are generally experts and well-experienced in the field in which they are called upon to arbitrate.

Some people say arbitration is cheaper, but this isn't necessarily so, especially if the parties have lawyers and have agreed to allow discovery comparable to that allowed by the regular courts. Besides, there are hefty filing fees for arbitration. (In commercial arbitration, the filing fee is usually a percentage of the damages sought, which means it can cost a couple thousand dollars just to file the demand for arbitration.) Also, the arbitrator must be paid a daily fee, as well as other expenses, and this could amount to several thousand dollars.

Arbitration or mediation? Arbitration is not the only alternative to litigation. The parties might also agree to mediation. Mediation is nonbinding: The mediator does not render a decision, the parties do not have to accept the mediator's recommendations or advice, nothing is enforceable in court, and the parties can still litigate. Mediation is also more circumscribed than arbitration: no lengthy discovery and no calling of witnesses and cross-examination. The parties and their lawyers simply get together to present their sides. A mediation may last only a couple of hours.

To preserve their right to go to court, but to avoid making the courthouse the first stop, some associations attempt to negotiate mediation clauses into a contract. The parties agree that before filing suit, they will make a good-faith effort to resolve any disputes between them by mediation first. If that fails, either may sue.

Binding or nonbinding? When binding, an arbitrator's decision may be enforced in court and it is difficult to overturn. But the parties can agree that the decision not be binding. To be sure, this limits the usefulness of arbitration as a tool for contract dispute resolution, but it may serve as a deterrent to litigation.

Scope of authority. The parties may have as broad or as narrow a scope for arbitration as they wish. For example, a hotel and an association could agree that all disputes will be subject to binding arbitration. Or they might be willing to submit only certain issues to the arbitrator.

Place. In the absence of an agreement as to the place, arbitration takes place wherever the person demanding it files. The parties should either specify the place of arbitration or provide that it will take place in a locale mutually agreeable or acceptable to the parties.

How many arbitrators? Sometimes an arbitration clause will require three arbitrators: one chosen by the hotel, one chosen by the association, and the third chosen by the first two arbitrators. This is unnecessary. The arbitrator hired by each side will rule in that side's favor, so the third person decides the case anyway. Thus, the parties are paying for three arbitrators when one does the job.

Who pays? Parties usually agree that they will split the cost of the arbitration itself evenly and otherwise bear their own expenses individually. However, it is becoming more common to see arbitration clauses provide that the winning or prevailing party will pay the other side's expenses, too.

George D. Webster is general counsel emeritus to ASAE and a partner in Webster, Chamberlain & Bean. This Washington, D.C., law firm is counsel to more than 200 nonprofit organizations.